2028 Shockwave? Why 75 Years of American Prosperity Could Be About to Hit a Brick Wall.

The S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) have tumbled lower in recent weeks, led by fears that the artificial intelligence (AI) bull market may be coming to an end.

However, the way it may end might not be what most people expect. Specifically, many analysts are now concerned that the "Citrini Scenario" is becoming increasingly likely.

What is the Citrini Scenario? Let's discuss that, as well as the evidence supporting it and what investors can do to prepare themselves and their portfolios.

Image source: Getty Images.

The Citrini Scenario

So, what is the Citrini Scenario? In short, it is a thought experiment conjured up by James van Geelen, a research analyst at Citrini Research, and Alap Shah, an AI entrepreneur.

The thought experiment is simple. It imagines a three-part play in which AI becomes so successful that it undermines the U.S. economy.

Step 1: AI agents improve rapidly and begin to supplant white-collar workers and software-as-a-service (SaaS) providers.

Step 2: Companies -- seeing the boost in profits, both internally and at competitors -- invest heavily in additional AI agents, displacing more workers in the process. As white-collar positions become scarcer, unemployed workers seek lower-paying jobs, driving down overall wages.

Step 3: Overall, productivity appears to be booming. Corporate profits soar, but the prosperity is an illusion. In reality, the economy enters a negative feedback loop. As formerly prosperous professionals find it hard to make ends meet, they sharply reduce their spending, leading to massive declines in consumer spending -- the lifeblood of the American economy.

However, what's perhaps most shocking about the scenario is the speed with which the authors envision these changes. They imagine them coming to pass by mid-2028, accompanied by a 38% stock market crash and an unemployment rate north of 10%.

Is it possible?

The first question anyone should ask is this: Is this scenario even remotely possible? The answer, I'm sorry to say, is yes.

Most of us can understand this from our own personal experience. AI is everywhere, and AI advancements are happening faster than ever -- including in the workplace. It's logical to assume that more organizations will soon begin replacing workers with AI agents.

A recent report from Goldman Sachs suggests that AI agents will eventually displace 300 million full-time workers worldwide. That threatens the U.S. white-collar workforce, which accounts for about 58% of the overall U.S. labor force.

This brings us to the real threat: The U.S. economy is built on consumer spending.

Since 1945, consumer spending has accounted for the majority of the U.S. economy -- as determined by an economic measurement called gross domestic product (GDP). Indeed, on average over the last 75 years, consumer spending has accounted for about 60% of GDP.

In the last 25 years, that figure is closer to 70%. If AI were to seriously disrupt the professional labor force and cut its wages, the results could be dramatic.

Former professionals with little to no disposable income would have to drastically reduce their discretionary spending. That, in turn, would dampen corporate profits. In response, those companies might invest in additional AI agents to boost productivity, leading to additional layoffs and so on.

In short, rapid AI adoption could bring on an economic crisis.

Image source: Getty Images.

What can be done?

That's all pretty gloomy for humans, but don't panic. While the Citrini Scenario is both frightening and plausible, that doesn't make it inevitable.

AI adoption might come at a slower pace than the scenario imagines. What's more, businesses might not cut workers at the frantic pace that leads to a negative feedback loop. Instead of a massive wave of job cuts, companies might simply slow their hiring.

Finally, and perhaps most importantly in my view, the Citrini Scenario neglects the positive side of AI adoption. As with past technological developments, AI will create jobs that do not presently exist, providing opportunities for those displaced by AI adoption.

At any rate, while I personally don't believe the Citrini Scenario is likely to happen, I can understand why some investors may be inclined to take a defensive stance in the face of the threat. However, I don't think investors should go straight into cash. Remember, timing the market is impossible, and it is one of the most surefire ways to ensure long-term underperformance.

Instead, investors would be better served by reallocating a portion of their portfolios to energy and utility stocks. While these sectors would not be completely immune from drawdowns in an AI-led recession, they would still be more insulated than almost any other sector of the economy. After all, an explosion of AI agents as envisioned in the Citrini Scenario would require enormous amounts of energy and the requisite infrastructure to deliver it. ETFs like the State Street Energy Select Sector SPDR ETF (NYSEMKT: XLE) and the Vanguard Utilities ETF (NYSEMKT: VPU) are both low-cost options for investors looking to increase their exposure to these industries. The defensive nature of these ETFs, coupled with their exposure to the data center ecosystem, will provide peace of mind to those who fear a Citrini-led bear market.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.